Category: Banking Culture

A 21st century approach to dealing with failed banks

In a speech Sir Jon Cunliffe Deputy Governor for Financial Stability, Bank of England, urges regulators and banks to press ahead with implementing rules designed to enable banks to fail without the need for government bailouts.  Jon says that a vast amount of work has been done to come up with better ways to deal with a failed bank and a better answer than ‘the taxpayer’ to the question of ‘who pays?

“I think it is possible to have a world in which large banks can fail in an orderly way – without the contagion and damage to the economy that in the past has forced the taxpayer to come in and absorb losses. But there is no single, silver bullet to achieve that; rather it requires the application of a comprehensive set of policy and powers.”

Jon declares that the UK is now in a much stronger position to deal with bank failures than it was in 2008, thanks to substantial progress on five key planks of reform: improved bank resilience; ensuring that authorities have the necessary powers and machinery to manage the failure of a bank; structuring banks so that they are resolvable; ensuring that banks are financed in a way that supports resolution, and international cooperation.

However, moving to an effective resolution regime will require a major transition, Jon warns: “Many larger banks will need to make changes to their structure and financing.  There will inevitably be higher costs as the implicit public subsidy is removed. There is no free lunch.”

Jon observes there is evidence that the multipronged approach to addressing Too Big To Fail is already having an effect:  ratings agencies have started to reduce their “government support” uplifts for big banks, while spreads between senior and structurally subordinated debt of UK Global Systemically Important Banks (G-SIBs) suggests that resolution regimes are gaining credibility. 

“In part, this is a result of the entry into force of the BRRD, and in the UK the Bank’s consultation paper on the setting of the Minimum Requirement for own funds and Eligible Liabilities (MREL). But it has almost certainly been reinforced by other events that have brought the issue into sharper relief,” Jon notes, adding that one of the key benefits of ensuring that certain creditors can be bailed in is that those creditors have a much stronger incentive to monitor and, if necessary, constrain the risks banks are taking.

Nonetheless, the transition to an effective resolution regime needs to be carefully managed, which is why the Bank of England is pursuing an approach to resolution in the UK that is proportionate, gradualist and provides clarity to banks and their creditors.

“The resolution requirements for a bank should be what is necessary to deliver the resolution strategy for that bank – no more and no less,” according to Jon.

The Bank’s proposed approach to setting MREL is based on the judgement that large banks cannot be allowed to cease operating abruptly; they have to be stabilised and resolved over time. As a result, the bank needs to have enough debt that can be bailed in to restore its capital so it can continue to operate as an authorised firm while it is being resolved. Smaller banks that can more easily be separated need to hold resources to recapitalise only the parts of their business that provide critical economic services and that can be sold, while the remainder can go into insolvency. The very smallest institutions do not need to be kept in operation as an abrupt stop in activity should not generate contagion or damage the economy. Insolvency rather than resolution is the proportionate strategy and so they do not need bail in debt.

In keeping with the second key principle, gradualism, the Bank is proposing to allow the full four year transition period for banks to meet their MREL requirements.  This will allow the market for MREL – eligible debt to develop and allow banks to smooth out their debt issuance, minimising issuance and interest costs.

Finally, banks and their creditors need to have clarity – both in relation to the requirements of the new regime and clarity as to their liability if things go wrong.

“This is not just a case of making sure that those that buy bank debt that can be bailed in realise the risks of the instruments they have purchased.  It also means making sure that creditors understand the resolution strategy of the institution to which they have lent money.  Unprotected depositors in institutions that have no bail in debt should be clear that in the event of trouble, they stand next in line after shareholders when it comes to absorbing losses.”

Jon concludes that while regulators cannot expect to insulate fully all institutions from all external shocks, the legal, financial and practical arrangements are in place to resolve banks of all sizes.

“But this will only be true if we implement the new regime on resolution fully.  Both regulators and industry have an incentive to do so.  If, next time there is a crisis, authorities face the same unenviable choice as in the crisis, if taxpayer bailouts cannot be avoided, then the case for breaking up banks and making them much, much simpler will be very hard to resist.”

“The powers, international standards and institutions are all in place. The authorities and the banking system have strong and common incentives to complete the implementation. It is in all our interests that we do so.”

 

Stronger role for ombudsman is the key to protecting bank customers

From The Conversation.

The federal government responded to calls for a banking royal commission with a raft of changes to the Australian Securities and Investment Commission (ASIC) but for consumers, who bore the brunt of the recent financial scandals, it is further potential changes to the Financial Ombudsman Service (FOS) that may matter the most.

The media has focused on recommendation for change at ASIC, where the majority of recommendations announced yesterday were outcomes of the ASIC Capability Review. The review was itself was recommended by the 2015 Financial System Inquiry, which commenced began back in 2014.

It is good to see movement on these recommendations, though some of the fine points such as the user-pays funding model and ASIC’s new recommended internal governance structure may remain subject to debate.

Equally if not more important for consumers is the government’s new review – also announced yesterday – of the Financial Ombudsman Service (FOS) and other external dispute resolution schemes. This is where average Australians takes up cases of carelessness, wrongdoing, negligence and fraud every day. According to reports, the FOS alone received 30,000 complaints last year. It is the coal face.

The FOS, itself operating under ASIC’s regulatory guidance, is the natural place for consumers to find their voice. It is an independent body for dispute resolution, keeping cases away from the courts with the aim of enabling consumers to win remedial action at lower cost and in less time. There are reported issues around about the response time of staff at the FOS, and the overall resources available to support work volumes and complexity, but the need for a strong FOS appears to be undisputed.

Submissions to the original Financial System Inquiry in early 2014 attest to the role of the FOS, and hint at its potential effectiveness. In one submission, the Consumer Credit Legal Centre in NSW provides case study after case study of consumers who went to the FOS seeking help for unpaid insurance claims, fraudulent mortgages and irresponsible lending practices.

In an ideal world, these circumstances would not arise – but no system is perfect, or immune from abuses. The submission of consumer group Choice to the inquiry also recognised the role of external dispute resolution schemes for both consumers and the benefit of the overall system.

In light of ongoing issues and scandals in the financial sector, it might be reasonable to consider further beefing up the resources and powers of the FOS. Policing a system through high level surveillance is one way to detect problems; gathering intelligence from the grassroots is another.

But the system is messy. In addition to the FOS, the external dispute resolution landscape includes the Credit and Investment Ombudsman and the Superannuation Complaints Tribunal, each with their own guidelines of where and how they can get involved in a case. This is a confusing menu of options for the consumer, even after the 2008 consolidation that brought the number of schemes down from eight to three.

The role, powers and governance of these bodies will now be the subject of another independent review, with an expert panel to be convened and asked to report back by the end of this year. Among other items, this review might consider removing these bodies from ASIC.

Such a separation would leave ASIC free to concentrate on its core role: ensuring market integrity through surveillance and enforcement. It would relieve ASIC of the responsibility for consumer protection in financial services – the only industry where ASIC instead of the ACCC has a mandated role in relation to consumer protection.

A suggestion to relocate responsibility for consumer protection in financial services from ASIC to ACCC was one of the suggestions made by Alex Erskine, in a paper submitted to the Financial Services Inquiry and published by the Australian Centre for Financial Studies in 2014. In the paper, Erskine argues that ASIC suffers from being charged with six policy objectives and insufficient tools – thus failing the Tinbergen Principle that holds that every single policy objective needs to have at least one policy tool if it is to be realised.

This analysis merits careful consideration. In every other industrial sector in Australia, the ACCC is charged not only with consumer protection, but also competition.

The importance of competition in promoting efficiency and encouraging satisfactory consumer outcomes was a theme that carried through the findings and recommendations of the Financial Services Inquiry, and remains a subject of great public debate in relation to the financial services sector.

ACCC holds sufficient power to investigate any matter of unconscionable conduct, whether within a single firm or on an industry-wide level. It is also the competition regulator. These activities sit within its core mandate and institutional expertise. What is the role of this regulator in Australia’s financial system?

The opus magnum of the Financial System Inquiry continues to be written, as the industry now awaits the outcome of another highly significant review.

Author: Amy Auster, Executive Director, Australian Centre for Financial Studies

Banks Act to Strengthen Community Trust

In response to the recent discussions on bank culture, and regulation, Australia’s banks have announced they will begin to implement comprehensive new measures to protect consumer interests, increase transparency and accountability and build trust and confidence in banks. Of note is a review of product sales commissions, enhanced complaints procedures, and whistle blower procedures. They will publish quarterly reports on progress.

“This package aims to address consumer concerns about remuneration, the protection of whistleblowers, the handling of customer complaints and dealing with poor conduct,” Australian Bankers’ Association Chief Executive Steven Münchenberg said.

“Customers expect banks to keep working hard to make sure they have the right culture, the right practices and the right behaviours in place.

“That’s why the banks will immediately establish an independent review of product sales commissions and product based payments, with a view to removing or changing them where they could result in poor customer outcomes,” he said.

“Banks will also improve their protections for whistleblowers to ensure there is more support for employees who speak out against poor conduct.

“This plan delivers immediate action to make it easier for customers to do business with banks, including when things go wrong. For example, improved complaints handling and better access to external dispute resolution, as well as providing compensation to customers when needed,” he said.

The plan, parts of which are subject to regulatory approval or legislative reform, will be overseen by an independent expert.

“We recognise the importance of having an impartial third party to oversee this process,” Mr Münchenberg said.

“The industry has appointed Gina Cass-Gottlieb, Gilbert + Tobin Lawyers, to lead the work on establishing the governance arrangements around the implementation of the plan, the review process, public reporting, and the selection of an independent expert to oversee implementation of this initiative.

“The banks also support the Federal Government’s review of the Financial Ombudsman Service, who is the independent umpire for customer complaints, to ensure it has the power and scope required to deal with a variety of issues that currently fall outside its thresholds,” he said.

“Trust is at the centre of banking and is critical for the stability of our financial system. The strength of our banking sector got us through the global financial crisis. Since then banks have done a lot of work in improving customer satisfaction, strengthening their balance sheets, and making it easier for customers to do their banking wherever and whenever they want.

“The plan also responds to a range of expert reports and public inquiries that have identified key areas of reform, including the Financial System Inquiry.

“Banks recognise the importance of the community discussion about the delivery of banking and financial services, and are pleased to put forward this plan,” Mr Münchenberg said.

A copy of the industry statement is below. 

Industry Statement

Australia’s banks understand that trust is critical to a strong and stable banking and financial services sector. We acknowledge that we have a privileged role in the economy. Our customers, shareholders, employees and our communities rightly expect the behaviour of banks to meet high ethical standards as we look after their financial needs.

For some years now banks have been responding to community feedback to improve customer service and our industry’s contribution to the community more broadly. This has been largely successful. While all banks have customer satisfaction ratings above 80%, we acknowledge there is more to do. We continue to implement wide ranging reforms that have already been agreed through the inquiries, reviews and consultations undertaken over recent years.

Subject to regulatory approval, we are committing to a further six actions to make it easier for customers to do business with us and to give people confidence that when things go wrong, we will do the right thing.

We understand the importance of independence and transparency. To ensure this, the industry has appointed Gina Cass-Gottlieb, Gilbert + Tobin Lawyers, to lead the work on establishing the governance arrangements around the implementation of the plan, the review process, public reporting, and the selection of an independent expert to oversee implementation of this initiative. This initial stage will take a month. We will publish public quarterly reports on our progress, with the first report within three months of this announcement.

We believe these actions will further lift standards and transparency across the banking and financial services sector and bolster the existing strength of the regulatory framework.

1. Reviewing product sales commissions

  • Building on the ‘Future of Financial Advice’ reforms, we will immediately establish an independent review of product sales commissions and product based payments with a view to removing or changing them where they could lead to poor customer outcomes. We intend to strengthen the alignment of remuneration and incentives and customer outcomes. We will work with regulators to implement changes and, where necessary, seek regulatory approval and legislative reform.
  • Each bank commits to ensure it has overarching principles on remuneration and incentives to support good customer outcomes and sound banking practices.

2. Making it easier for customers when things go wrong

  • We will enhance the existing complaints handling processes by establishing an independent customer advocate in each bank to ensure retail and small business customers have a voice and customer complaints directly relating to the bank, and the third parties appointed by the bank, are appropriately escalated and responded to within specified timeframes.
  • We support a broadening of external dispute resolution schemes. We support the Government’s announcement to conduct a review into external dispute resolution, including the Financial Ombudsman Service conducting a review of its terms of reference with a view to increasing eligibility thresholds for retail and small business customers.
  • We will work with ASIC to expand its current review of customer remediation programs from personal advice to all financial advice and products.
  • We will evaluate the establishment of an industry wide, mandatory last resort compensation scheme covering financial advisers. We support a prospective scheme being introduced where consumers of financial products who receive a FOS determination in their favour would have access to capped compensation where an adviser’s professional indemnity insurance is insufficient to meet claims.

3. Reaffirming our support for employees who ‘blow the whistle’ on inappropriate conduct

  • We will ensure the highest standards of whistleblower protections by ensuring there is a robust and trusted framework for escalating concerns. We will standardise the protection of whistleblowers across banks, including independent support, and protection against financial disadvantage. As part of this, we will work with ASIC and other stakeholders.

4. Removing individuals from the industry for poor conduct

  • We will implement an industry register which would extend existing identification of rogue advisers to any bank employees, including customer facing and non-customer facing roles. This will help prevent the recruitment of individuals who have breached the law or codes of conduct.

5. Strengthening our commitment to customers in the Code of Banking Practice

  • We will bring forward the review of the Code of Banking Practice. The Code of Banking Practice is the banking industry’s customer charter on best practice banking standards, disclosure and principles of conduct. The review will be undertaken in consultation with consumer organisations and other stakeholders, and will be completed by the end of the year.

6. Supporting ASIC as a strong regulator

  • We support the Government’s announcement to implement an industry funding model. We will work with the Government and ASIC to implement a ‘user pays’ industry funding model to enhance the ability for ASIC to investigate matters brought to its attention.

  • We will also work with ASIC to enhance the current breach reporting framework.

Morrison warns banks not to pass on new ‘user-pays’ impost to finance ASIC reform

From The Conversation.

Treasurer Scott Morrison has warned Australian banks not to pass on to customers the $121 million user-pays charge imposed on them to finance a strengthened Australian Securities and Investments Commission (ASIC).

The banks will pay for almost all the $127 million four-year package, which the government hopes will take the sting out of Labor’s promise that it would set up a royal commission.

But Opposition Leader Bill Shorten said the issues were not just matters of the law but the culture.

The government will provide $61.1 million to boost ASIC’s technology to boost its surveillance capabilities. “In the 21st century economy, you need a tech cop on the beat,” Morrison said.

Another $9.2 million will go to ASIC and Treasury to ensure they can implement appropriate law and regulatory reform.

ASIC will get a further $57 million for the ongoing cost of increased surveillance and enforcement in the areas of financial advice, responsible lending, life insurance and breach reporting.

The measures follow a capability review of ASIC initiated by the government in July.

Among other changes, an extra ASIC commissioner will be appointed with experience in the prosecution of crimes in the financial services industry.

The government is accelerating the implementation of recommendations from the Murray review of the financial system for increased penalties and greater powers for ASIC to intervene on financial products.

ASIC’s employment practices will be exempted from the public service act, so it can recruit from the market people with experience in the sector.

The government will recommend that the financial services ombudsman changes its thresholds to provide greater access for treatment of claims and compliance.

An “eminent panel” will examine bringing together forums to have a “one stop shop” for consumer complaints.

Morrison told a joint news conference with Assistant Treasurer Kelly O’Dwyer that the banks would pay an additional $121 million to increase the resources of ASIC.

ASIC would also be moved to a full user-pays funding model. “No longer will it be the case that taxpayers will be hit to fund this regulator, this enforcement authority, this cop on the beat. Those whom it’s enforcing the regulations and rules on, will pay the price for that,” he said.

Asked whether the banks would not just pass on the impost in higher fees and charges, Morrison said the levies were “easily digestible by the banks”. He would be “furious” if the banks sought to pass the cost on and they had that message from him.

The term of ASIC chairman Greg Medcraft, which is expiring, has been extended – but only for 18 months to oversee the implementation of the reforms.

Making his pitch for reforming ASIC rather than having a royal commission, Morrison said: “What I have outlined today is a serious action plan. … This is what practical, effective targeted government looks like and that’s how we are responding to these issues of real concerns to Australians.”

He said Shorten “wants to spend your money to fund his political exercise which won’t get outcomes for people – it will just get a political outcome for Bill Shorten”.

O’Dwyer denied that the government previously tried to wind back consumer protections in the financial sector. “That’s simply not correct,” she said.

The Abbott government introduced regulations to water down the Labor government’s Future of Financial Advice (FOFA) reforms. But later these were disallowed by the Senate.

Shadow treasurer Chris Bowen said the package was “nothing more a political fix” to try to avoid a royal commission. “It’s a plan to hobble through an election.”

Responding to the government’s announcement Westpac said “The measures announced today by the government will play an important role in ensuring customers can be confident in our banking system.

“In line with our submission to the financial system inquiry, Westpac supports a user pays model for ASIC.”

Australian Bankers’ Association chief executive Steven Münchenberg said: “We support the introduction of a new industry funding model for ASIC” adding that it was “important that contributions are transparent and that the amount of fees levied matches the level of regulation and resources required for ASIC”.

He said that the banking industry supported, in principle, the product intervention power for ASIC to bolster consumer protections. “However, we need to be wary of any action that may have unintended consequences and adversely impact on product innovation or consumer choice.”

Author: Michelle Grattan, Professorial Fellow, University of Canberra

ASIC welcomes significant reforms

ASIC today welcomed the Government’s announcement of major additional funding for the regulator.

‘This will enable further surveillance and enforcement in areas such as financial planning, responsible lending, life insurance, and misconduct and breach reporting. It will also allow us to build our technological capacity to identify and assess risks and misconduct,’ said ASIC Chairman Greg Medcraft.

ASIC welcomed the Government’s support for the introduction of an Industry Funding Model.

‘ASIC has long believed that those who generate the need for regulation should pay for it,’ Mr Medcraft said.

‘ASIC has worked with Treasury to consult with industry and we look forward to continued engagement with those we regulate to see Industry Funding work well.’

ASIC also welcomed the Government’s response to the Capability Review. ASIC has provided an official response to the Capability Review which sets out the positive actions ASIC is already taking or will take to develop its capabilities in areas such as governance, culture and communication.

‘The Capability Review provided ASIC with the opportunity to consider the capabilities we need for the future to ensure trust and confidence in the markets we regulate and to deliver improved market outcomes for the Australian community. We thank the panel for its findings, observations and recommendations,’ Mr Medcraft said.

ASIC also noted the Government’s commitment to ensuring the key recommendations from the Financial System Inquiry are implemented as a matter of priority.

‘We will work with the Government and Treasury to make sure the regulatory framework allows ASIC to most effectively address market misconduct and contains the appropriate incentives for firms to put their customers first.

‘I also welcome the Government’s appointment of an additional commissioner for ASIC.’

On the 18-month extension to his term, Mr Medcraft said, ‘I welcome the Minister’s extension to my term as chairman.

It is an honour to be ASIC chairman and to work alongside the outstanding men and women employed here. We have a lot of important work to continue and I am keen to get on with the job.’

Small Amount Credit Review Recommends Tighter Controls

The final report of the Review of Small Amount Credit Contracts (SACCs) has been released. A range of recommendations tighten regulation of short term small loans and consumer leases. Of note is the need to disclose the actual APR of the transaction, be it a small amount credit contract or consumer lease. In the latter case, the cost of the relevant household good must be disclosed.

The review panel provided the Final Report to the Government on 3 March 2016.

The review was silent on mandating better collection of transaction data so  the true volume of loans could be recorded. As highlighted in the report accurate data is an issue.

Small Amount Credit Contracts (SACCs)

Recommendation 1 – Affordability – Extend the protected earnings amount regulation to cover SACCs provided to all consumers.
Reduce the cap on the total amount of all SACC repayments (including under the proposed SACC) from 20 per cent of the consumer’s gross income to 10 per cent of the consumer’s net (that is, after tax) income. Subject to these changes being accepted, retain the existing 20 per cent establishment fee and 4 per cent monthly fee maximums.
Recommendation 2 – Suitability – Remove the rebuttable presumption that a loan is presumed to be unsuitable if either the consumer is in default under another SACC, or in the 90-day period before the assessment, the consumer has had two or more other SACCs.
This recommendation is made on the condition that it is implemented together with Recommendation 1.
Recommendation 3 – Short term credit contracts – Maintain the existing ban on credit contracts with terms less than 15 days.
Recommendation 4 – Direct debit fees – Direct debit fees should be incorporated into the existing SACC fee cap.
Recommendation 5 – Equal repayments and sanction – In order to meet the definition of a SACC, the credit contract must have equal repayments over the life of the loan (noting that there may need to be limited exceptions to this rule). Where a contract does not meet this requirement the credit provider cannot charge more than an annual precent rate (APR) of 48 per cent.
Recommendation 6 – SACC database – A national database of SACCs should not be introduced at this stage. The major banks should be encouraged to participate in the comprehensive credit reporting regime at the earliest date.
Recommendation 7 – Early repayment –  No 4 per cent monthly fee can be charged for a month after the SACC is discharged by its early repayment. If a consumer repays a SACC early, the credit provider under the SACC cannot charge the monthly fee in respect of any outstanding months of the original term of the SACC after the consumer has repaid the outstanding balance and those amounts should be deducted from the outstanding balance at the time it is paid.
Recommendation 8 – Unsolicited offers – SACC providers should be prevented from making unsolicited SACC offers to current or previous consumers.
Recommendation 9 – Referrals to other SACC providers – SACC providers should not receive a payment or any other benefit for a referral made to another SACC provider.
Recommendation 10 – Default fees – SACC providers should only be permitted to charge a default fee that represents their actual costs arising from a consumer defaulting on a SACC up to a maximum of $10 per week. The existing limitation of the amount recoverable in the event of default to twice the adjusted credit amount should be retained.

Consumer Leases

Recommendation 11 – Cap on cost to consumers – A cap on the total amount of the payments to be made under a consumer lease of household goods should be introduced. The cap should be a multiple of the Base Price of the goods, determined by adding 4 per cent of the Base Price for each whole month of the lease term to the amount of the Base Price. For a lease with a term of greater than 48 months, the term should be deemed to be 48 months for the purposes of the calculation of the cap.
Recommendation 12 – Base Price of goods – The Base Price for new goods should be the recommended retail price or the price agreed in store, where this price is below the recommended retail price. Further work should be done to define the Base Price for second hand goods.
Recommendation 13 – Add-on services and features – The cost (if any) of add-on services and features, apart from delivery, should be included in the cap. A separate one-off delivery fee should be permitted. That fee should be limited to the reasonable costs of delivery of the leased good which appropriately account for any cost savings if there is a bulk delivery of goods to an area.
Recommendation 14 – Consumer leases to which the cap applies – The cap should apply to all leases of household goods including electronic goods.
Further consultation should take place on whether the cap should apply to consumer leases of motor vehicles.
Recommendation 15 –Affordability – A protected earnings amount requirement be introduced for leases of household goods, whereby lessors cannot require consumers to pay more than 10 per cent of their net income in rental payments under consumer leases of household goods, so that the total amount of all rental payments (including under the proposed lease) cannot exceed 10 per cent of their net income in each payment period.
Recommendation 16 – Centrepay implementation – The Department of Human Services consider making the caps in Recommendations 11 and 15 mandatory as soon as practicable for lessors who utilise or seek to utilise the Centrepay system.
Recommendation 17 – Early termination fees – The maximum amount that a lessor can charge on termination of a consumer lease should be imposed by way of a formula or principles that provide an appropriate and reasonable estimate of the lessors’ losses from early repayment.
Recommendation 18 – Ban on the unsolicited marketing of consumer leases – There should be a prohibition on the unsolicited selling of consumer leases of household goods, addressing current unfair practices used to market these goods.

Combined recommendations

Recommendation 19 – Bank statements – Retain the obligation for SACC providers to obtain and consider 90 days of bank statements before providing a SACC, and introduce an equivalent obligation for lessors of household goods. Introduce a prohibition on using information obtained from bank statements for purposes other than compliance with responsible lending obligations. ASIC should continue its discussions with software providers, banking institutions and SACC providers with a view to ensuring that ePayment Code protections are retained where consumers provide their bank account log-in details in order for a SACC provider to comply with their obligation to obtain 90 days of bank statements, for responsible lending purposes.
Recommendation 20 – Documenting suitability assessments – Introduce a requirement that SACC providers and lessors under a consumer lease are required at the time the assessment is made to document in writing their assessment that a proposed contract or lease is suitable.
Recommendation 21 – Warning statements – Introduce a requirement for lessors under consumer leases of household goods to provide consumers with a warning statement, designed to assist consumers to make better decisions as to whether to enter into a consumer lease, including by informing consumers of the availability of alternatives to these leases. In relation to both the proposed warning statement for consumer leases of household goods and the current warning statement in respect of SACCs, provide ASIC with the power to modify the requirements for the statement (including the content and when the warning statement has to be provided) to maximise the impact on consumers.
Recommendation 22 – Disclosure – Introduce a requirement that SACC providers and lessors under a consumer lease of household goods be required to disclose the cost of their products as an APR. Introduce a requirement that lessors under a consumer lease of household goods be required to disclose the Base Price of the goods being leased, and the difference between the Base Price and the total payments under the lease.

The Government is also consulting on whether the recommendations relating to consumer leases should apply to all regulated consumer leases (including motor vehicles) rather than only leases of household goods, and how second hand goods should be treated.

Bendigo and Adelaide Bank Update

In their business strategy and trading update today, they recapped on lending growth which  has been below system, and that they have a cost to income ratio which is still high (~2% above Suncorp).

Ben4NIM is under some pressure.

Ben6However, the bank is quite well positioned from a funding perspective. 81% is deposit funded, could go higher, this is significant because RMBS market funding pricing is line ball at the moment. They have moved from 20% to 6% RMBS, and this has created a capital headwind, so they will most likely focus on senior funding.

Ben7In terms of Strategy, Bendigo and Adelaide Bank, describes its aim to build around customer engagement and staff engagement, with an expectation that digital channels and customer centricity will out.

Ben3They are driving towards 24/7 digital platform, underpinned by their core banking system. Their vision is to be the most customer connected bank with a focus on customer service and the strengthening of core relationships.

Ben5However it is clear they are banking on benefits of moving from standard to advanced IRB capital model. Whilst they may wish to move to this basis, and this may be a phased implementation, it will be APRA who is holding the implementation cards. There is a benefit as their current mortgage risk weighting is about 39 basis points, whereas the major banks have a 25 basis point target by July 2016.

Homesafe will continue to be a drag on the business if property valuations in the major centres fall as the portfolios have to be marked to market, they of course had upside in the good times! 3Q16 Homesafe contribution was -$1.6m pre-tax. There are 2,500 contracts in the portfolio, average $125,000 funded.

Ben8Lending will be important and they wish to grow their books, with a focus on mortgages and small business (both highly contested areas). Arrears on mortgages and business seem under control.

Ben9Ben10They have a significant investment path in order to build the digital platform and IRB models. Restructure costs will be $2m or more in the half. The question will be whether the benefits out way the costs. You cannot really argue with the strategy, (though, it is not really a mobile first strategy), but its all about effective execution in a highly contested environment. The high customer satisfaction ratings will certainly assist.

 

Talk of reforming toxic banks is misguided: improve the product and culture will follow

From The Conversation.

The recent and strident language from financial regulators, politicians and credit ratings agencies about financial services culture is a sure indicator that something is seriously amiss in the sector.

This spike in hostility has arisen from some despicable behaviour and outcomes; however, neither reform of culture nor technological innovation are panaceas, as ideologies cannot replace a clear understanding of these complex businesses.

There are several markers in this conversation which need to need to be teased out because there is a real danger that consumers could end up suffering higher costs, achieve even less peace of mind dealing with financial services providers, and potentially transfer huge enterprise value to disruptive players which may ultimately misplace consumers’ trust in even quicker time than the so-called legacy institutions.

Firstly, understanding and addressing culture is far more complex than expressing a reactive political and regulatory narrative. As conduits of reasonable anger and disillusionment, politicians express a belief that parentalism will ensure that consumers are protected from harm. There are limitations to the regulatory narrative. Columbia University Law School Professor John Coffee identifies the causal and lagged link between appalling market outcomes and regulatory response.

On the other hand, industry participants need to re-assume authority over both narratives and rebuff further regulation.

This authority should arise from their constant and deep engagement with customers. Financial services firms own the benefits of information asymmetry (including emerging issues and product failures). This reinforces their authority.

Second, financial services institutions are complex businesses with many moving parts. Their interactions with customers occur in highly varied contexts or “customer-product interfaces”. Not surprisingly, it is a challenge to articulate an authentic cultural message for a financial services conglomerate.

Aggrieved customers and stakeholders mean that the term “customer-centric” is hollow. The customer’s wallet is the centre of what financial conglomerates do.

This commercial imperative is the legitimate reason that financial services exist. Similarly, financial innovation occurs because of the need to address customers’ economic needs, rather than mere predation. It solves customers’ problems and achieves a reasonable return for the provider within a highly regulated sector of the economy.

Providers of financial services therefore need to better explain what they actually offer and from there consumers can make informed decisions. There have been advances. The industry communicates in plain English and consumers are savvy enough to intuit that this industry provides a range of largely intangible things.

On the other hand, the industry seems to have difficulty in levelling with consumers about this, preferring to maintain institutional mystique (“trust us, there’s something more to it”).

The real challenge (and opportunity) is to reassure consumers in product interfaces, to clarify what is being provided, and if and when any trust is actually warranted. In other words, providers need to unbundle and explain simply what their products entail so that consumers (personal and institutional) understand what they are buying, if it suits their circumstances, and what (if any) trust is involved. Some examples are set out in the figure:

Bnak-Culture-ConversationThird, criticisms of culture are entwined with questions of morality. Legislation and regulation set boundaries informed by knowledge and conventions, and within this perimeter and the associated contested marketplace, providers must organise their businesses sustainably.At a high level, it is important to acknowledge that financial services firms are a mirror on their customers which have varying ethics and values. This must be the case, because otherwise they would not remain in business.

Society’s mores do change over time. Witness the prevailing household debt culture, the post-GFC emergence of government bailouts, the shallowing of thought and synthetic reasoning. However, it is unreasonable to expect the financial services industry to lead morality debates: rather that is the domain of legislators and regulators who need to both represent society and understand existing product markets.

Finally, informed regulation is especially important because digital technologies are being aggressively deployed to unbundle highly-regulated financial services. Innovations and industry disruption need to be carefully assessed so that consumers do not suffer from misunderstandings, broken promises and a loss of trust.

Although technology generally may suggest individual freedoms, transparency, engagement and creativity, when applied within financial services it is largely used for the more mundane functions of customer aggregation, processing documentation and bulk communications.

Informed regulators and providers therefore must work together to carefully consider if in fact innovation and disruptive technologies can genuinely resolve economic trade-offs and maintain a durable consumer trust. This will usually require an old-fashioned – but perennially trendy – strong balance sheet.

Author:  Martin Gold, Senior lecturer, Sydney Business School, Faculity of Business, University of Wollongong

APRA releases Trio investigation report

The Australian Prudential Regulation Authority (APRA) has released the report on its investigation into the failure of Trio Capital Limited (Trio), as a result of which APRA removed 13 former Trio directors from the superannuation industry for specified periods of time.

These 13 individuals were Trio Directors between 2003 and 2009, and APRA’s enforceable undertakings have prevented them from holding senior roles in the APRA-regulated superannuation industry for periods between 3 years 6 months and 15 years (with one having no expiry date).

APRA’s view is that, given the wide interest in this matter over a number of years, it is appropriate to release the investigation report as it provides a concise summary of the circumstances surrounding the collapse of Trio, together with an overview of APRA’s regulatory actions following the collapse.

The release of APRA’s investigation report follows the publication in May 2015 of final reports from the Trio liquidator and with the final steps in the winding up of Trio’s five registerable superannuation entities in progress.

APRA’s investigation focussed on six related-party investments totalling approximately $150 million, all of which were lost or unable to be recovered.  This included losses associated with investments in the Astarra Strategic Fund (ASF) as a result of fraudulent conduct.

The outcomes of the Trio investigation provide important lessons for trustees more broadly. APRA considers the significant investment losses can be attributed to a number of key factors:

  • inadequate investment governance processes;
  • failure to adequately manage conflicts of interest from dealings with related parties; and
  • failure to have adequate controls to mitigate fraud-related investment risk.

Since the Trio matter there have been a number of important enhancements to the regulation of the superannuation industry which impact directly on these three critical areas. These include introduction of prudential standards in superannuation, additional statutory duties imposed on trustees and directors, and further guidance provided by APRA on fraud risk management. Further detail on the lessons for trustees arising from the Trio investigation is available on APRA’s website at: www.apra.gov.au/Super/Publications/Pages/Other-Information-for-Superannuation.aspx

A copy of the investigation report is available on APRA’s website at: www.apra.gov.au/Super/Publications/Pages/Other-Information-for-Superannuation.aspx

Copies of APRA’s media releases announcing the enforceable undertakings of the 13 former Trio directors are available at: www.apra.gov.au/MediaReleases/Pages/13_34.aspx

Background

Q: What were the main outcomes of the investigation?
A: APRA accepted enforceable undertakings from 13 individuals, who were Trio directors between 2003 and 2009.  The enforceable undertakings effectively removed these individuals from holding senior roles in the APRA-regulated superannuation industry for periods between 3 years 6 months and 15 years (with one having no expiry date).

Q: What were the main areas of conduct by Trio directors that the investigation focused on?
A: The investigation focused on six related-party investments totalling some $150 million, all of which were lost or unable to be recovered.  The report notes that the key concerns identified by APRA were that Trio and former Trio directors failed to act in members’ best interests as:

  • the related-party investments had been made on the basis of insufficient due diligence;
  • the investments were on terms more favourable to related parties than would reasonably be expected had they been at arm’s length; and
  • there was inadequate monitoring of the performance of the related-party investments.

Q: What compensation has been provided to Trio members?
A: In 2011 and 2012 the Minister determined grants of financial assistance of approximately $55 million and $16.7 million respectively, totalling $71.7 million, for losses associated with the investments by Trio superannuation members in the ASF as a result of fraudulent conduct.  The grants included an allowance for costs associated with the grant applications and incidental costs of the acting trustee incurred as a consequence of the fraudulent conduct.

Q: What are the main lessons for industry from the Trio matter?
A: The main lessons for trustees out of Trio are the importance of a sound investment governance framework, adequately managing conflicts of interest and ensuring the risk management framework effectively manages fraud risk.  For further information on lessons for industry see www.apra.gov.au/Super/Publications/Pages/Other-Information-for-Superannuation.aspx

Q: What changes have there been to the prudential supervision of superannuation funds since the Trio matter?
A: In 2012 the Stronger Super Reforms expanded trustees’ statutory duties and included a duty to give priority to the interests of members over the interests of the trustee or other persons. APRA has also been given the power to make prudential standards in the superannuation industry, aligning APRA’s powers in this regard with those in the banking and insurance sectors. Prudential standards in superannuation also cover areas such as investment governance, conflicts of interest and risk management.

Q: Are there other relevant changes expected to the prudential framework for the superannuation industry?
A: The Government has introduced into Parliament legislative changes to further improve superannuation governance and improve transparency through portfolio-holding disclosure measures. APRA’s review of the Trio failure has also identified other areas of potential legislative reform, such as enhanced requirements for significant changes in ownership or control of RSE licensees, and is liaising with the Government on these changes.


The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $5.4 trillion in assets for Australian depositors, policyholders and superannuation fund members.

Banks get a bollocking from Turnbull on ethics

From The Conversation.

Prime Minister Malcolm Turnbull has given Australia’s banks a bollocking for unethical behaviour, suggesting they have not repaid the support they received during the global financial crisis.

Speaking at Westpac’s 199th birthday lunch – a day after the Australian Securities and Investment Commission launched legal action against the bank for allegedly manipulating the bank bill swap rate (BBSW) – Turnbull said many Australians were asking whether banks had lived up “to the standards we expect”.

He said he made no comments about any specific cases or institutions. “But we have to acknowledge that there have been too many troubling incidents over recent times for them simply to be dismissed.”

Banks did not just operate under a banking licence – “they operate under a social licence and that is underwritten by public confidence and trust”.

“We expect our bankers to have higher standards, we expect them always, rigorously, to put their customers’ interests first – to deal with their depositors and their borrowers, with those they advise and those with whom they transact in precisely the same way they would have them deal with themselves.”

He said he knew this was what the leaders of Westpac expected.

Turnbull said that during the global financial crisis – “or what probably should be better called the global banking crisis” – the Australian public, through the government, had provided the banks with vital support.

“Australians understood that we needed to ensure our banks kept trading, that a strong well-regulated financial sector in Australia was a great blessing, a great national asset,” he said.

He said today, many Australians were asking: “have our bankers done enough in return for this support?

“Have they lived up to the standards we expect, not just the laws we enact?”

Wise bankers recognised these were legitimate questions, Turnbull said. “Dismissing them as bank bashing misses the point.”

“The truth is that despite the public support offered at their time of need, our bankers have not always treated their customers as they should.

“Some, regrettably as we know, have taken advantage of fellow Australians and the savings they have spent a lifetime accumulating, seeking only dignity and independence in their retirement.”

Turnbull said that redressing wrongs was important, especially when “done promptly and generously”.

“Wise bankers understand that banks need to very publicly demonstrate that their values of trust, integrity, placing the customer first in every way – these must be lived and not just spoken.

“They recognise that remuneration and promotion cannot any longer be based solely on direct financial contribution to the bottom line. Employees who live those values, impart them to others and call out those who do not should be rewarded and recognised and promoted in a healthy banking culture.

“The singular pursuit of an extra dollar of profit at the expense of those values is not simply wrong but it places at risk the whole social licence, the good name and reputation upon which great institutions depend.

“Now all business is about more than just a profit or a new product – it’s about building opportunities for Australians, customers and staff and making a greater contribution to our nation.”

Nationals senator John Williams renewed his call for a royal commission into the financial sector. “First cab off the rank was Storm Financial. Then we went through the liquidators industry, where there’s some very bad eggs.

“Then of course we had the financial planning scandal. Now we’ve just had the managed investment schemes where billions of dollars were lost. Now the life insurance industry – and of course these latest allegations of bank bill swap rates.

“As time goes by the case builds stronger and stronger, in my opinion, for a royal commission into the finance sector. My concern is the culture is simply profit, profit, profit and to hell with the customers.”

Speaking to journalists after his address, Turnbull dodged a question on whether he would support a Royal Commission.

Author: Michelle Grattan, Professorial Fellow, University of Canberra